How the GOP tax-reform plan could affect you

The White House and congressional leaders released a framework for tax changes, but many key details have been left to tax committees. Here’s how that process is working.
Jeff Dionise, Ramon Padilla, Paul Singer and Herbert Jackson, USA TODAY

The tax-reform proposal outlined by congressional Republicans would affect Americans across the board with big changes for certain tax breaks and the outright elimination of others, though a few bold provisions got scaled back and the whole package is sure to face further tinkering.(Photo: Getty Images/Ingram Publishing)

Fewer brackets, lower rates

The GOP plan envisions five tax brackets for individuals, ranging from 0 percent for the lowest earners to 39.6 percent for those making the most money. The three middle brackets would be 12 percent, 25 percent and 35 percent. That compares with the current system of seven brackets ranging from 0 percent to 39.6 percent.

Mark Luscombe, principal federal tax analyst at Wolters Kluwer CCH, said retaining the 39.6 percent bracket was notable. "They had been saying the focus would be on middle-class tax cuts," he said. "They probably stuck that in to skew the cuts more to the middle class."

That top 39.6 percent rate would apply for married couples earning above $1 million annually, or $500,000 and up for others.

Radical changes on deductions

A core element of the GOP plan would be a major downsizing of the many deductions that have cluttered up the nation's tax code over the years. Many individual write-offs would disappear, though the charitable-donation deduction would be retained and homeowners would keep at least some of their key breaks. Roughly 24 percent of Arizonans claim a charity deduction, according to the Internal Revenue Service.

The personal exemption deduction, worth $4,050 for each taxpayer, spouse and any dependents, also would be repealed.

To compensate, the House Republican proposal would roughly double the standard deduction, which would benefit the roughly 70 percent of Arizonans, and Americans, who use this tax break rather than itemizing deductions separately.

The new standard deduction would jump to $12,000 from $6,350 for single taxpayers, with a rise to $24,000 from $12,700 for married couples filing jointly. It also would be indexed for inflation, meaning it would actually climb to $24,400 next year for married couples, for example.

Deductions facing the ax include those for state and local income taxes, medical expenses, property-casualty losses, moving expenses and alimony costs. In addition, the bill would scale down some higher-education benefits, including the interest deduction on student loans and a deduction for tuition expenses.

The state/local income tax issue has been especially contentious in high-tax states like New York and California, but not so much in Arizona. Roughly the same proportion of Arizonans deduct state income taxes compared with Americans generally, but the value of those writeoffs here is only about half the national average.

As for medical expenses, most people currently find them difficult to write off anyway. They're currently deductible on federal returns to the extent these costs exceed 10 percent of a person's income.

One aspect the plan doesn't touch is the ability of employees to deduct contributions to workplace 401(k) programs. There had been speculation that some contributions would need to be made using after-tax dollars, in so-called Roth accounts.

More on housing

The two key housing writeoffs — those affecting mortgage interest and property taxes — would change for some people. Existing homeowners would be able to deduct their mortgage interest, as is currently the case. But buyers of homes in the future would be limited to deducting interest on up to $500,000 in debt. That's down from a current cap of $1 million, Luscombe said.

That means someone who buys a $550,000 house in Scottsdale and makes a $50,000 downpayment could still deduct the full amount of the loan, but no more.

The property-tax deduction is another key item, especially in states such as New Jersey and Illinois, where rates are high, and places like California, where seven-figure home values are common. Under the proposal, homeowners could deduct up to $10,000 a year in state and local property taxes. Arizona's average property-tax burden is relatively mild, ranking 36th among the states, according to an analysis by the Tax Foundation.

The House GOP plan also would curtail Americans’ ability to avoid taxes on housing capital gains, which could be important for people sitting on large paper profits.

Currently, homeowners can skirt taxes on up to $250,000 of gains (singles) or $500,000 (married couples) if they both own and use a residence for at least two of the prior five years. The new plan would require homeowners to own and use a residence for at least five of the previous eight years. Also, this break would phase out for singles earning above $250,000 and couples making in excess of $500,000.

Credits expanded

Unlike deductions, which reduce the amount of income on which taxes are owed, credits are direct reductions in taxes themselves. The House GOP plan establishes a new family credit. That includes expanding the child tax credit to $1,600 from $1,000. It also would provide a credit of $300 for each parent and non-child dependent.

The proposal also would preserve the existing credit for child and dependent care. This tax break assists families in the care for children and older dependents such as disabled grandparents. The House GOP tax-reform plan also would retain the Earned Income Tax Credit, a popular break for low-income individuals claimed on 21 percent of federal tax returns filed in Arizona.

Relief for the wealthy

While the tax-reform plan retains that top 39.6 percent bracket, it offers some big potential breaks for the rich. Most significant is the eventual repeal of the estate, or death tax — a tax that applies to well under 1 percent of Americans — after six years. It also would immediately double the estate-tax exemption or exclusion amount, which is currently slightly above $5 million.

Tim Steffen, director of advanced planning for Baird Private Wealth Management, doesn’t expect this tax ultimately will be repealed. “Estate taxes are viewed as a tax only on the rich, and that's not exactly a sympathetic group,” he said.

The bill also would repeal the Alternative Minimum Tax, a tax system designed to ensure that nobody can use so many exemptions, deductions, credits and the like to avoid paying taxes. The AMT applied to fewer than 2 percent of Arizonans in 2015, the most recent year for which the IRS provided numbers.